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US Stimulus Boosted Growth by Up to 4.5%

James Politi and Robin Harding, Financial Times
Wednesday, 25 Aug 2010 | 7:40 AM ET

The $814 billion stimulus program enacted by the Obama administration at the start of 2009 boosted the US economy by as much as 4.5 percent in the second quarter of this year, keeping unemployment below 10 percent, congressional analysts said on Tuesday.

Stimulus Package
Stimulus Package

The report by the Congressional Budget Office , a non-partisan agency that studies the budgetary impact of legislation for members of Congress, will come as a boost to congressional Democrats and Obama administration officials, who have been arguing the recession would have been much deeper in the absence of the stimulus.

But it will raise further concerns about the sustainability of the already sputtering recovery in the absence of government support. If the economy had been 4.5 percent smaller in the second quarter of 2010, then real output would have been below even its lowest point during the recession.

Republicans have fiercely attacked the stimulusas ineffective government spending that added to the country’s budget deficit without meaningfully helping the economy.

The CBO analysis is much more sanguine, however. In its latest report, the agency said real gross domestic product was lifted in the second quarter by between 1.7 percent and 4.5 percent. Last month, the Commerce Department said the US grew at an annualized rate of 2.4 percent in the second quarter, but that is likely to be revised lower – closer to 1 percent, given the weaker economic data that have surfaced since.

This would mean the stimulus, whose impact will gradually fade away during the rest of the year, provided crucial support to the recovery between April and June. According to the CBO, the stimulus also reduced the unemployment rate – now at 9.5 percent – by between 0.7 and 1.8 percentage points during the quarter, as it increased the number of employed Americans by 1.4 million to 3.3 million people.

The CBO uses models from companies such as Macroeconomic Advisers and IHS Global Insight. But some skeptics question the assumptions of these models, saying they do not take enough account of people’s expectations of the future, when they will have to pay back the stimuluswith higher taxes.

"All this stimulus spending has gotten us nowhere?.?.?.?We are now borrowing 41 cents of every dollar we spend from our kids and grandkids," said John Boehner, Republican leader of the House.

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